賽默飛世爾科技 (TMO) 2006 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Thermo Fisher Scientific fourth quarter 2006 earnings conference call.

I would like to introduce our moderator for the call, Mr. Kenneth Apicerno, Vice President of Investor Relations.

Mr. Apicerno, you may begin the call.

Good morning and thank you for joining us.

On the call today we have Marijn Dekkers, our President and Chief Executive Officer, Marc Casper, Executive Vice President, and Pete Wilver, our Chief Financial Officer.

Please be aware that this call is being webcast live and will be archived on our website, www.thermofisher.com, until March 8, 2007.

To reach the replay on our website click on Investors and then Webcasts and Presentations.

Please also be aware that a copy of the press release setting fourth our fourth quarter 2006 earnings and future expectations is available in the Investors section of our website under the heading "Quarterly Results."

I'd like to begin the call by reading the Safe Harbor statement.

Various remarks that we may make about the Company's future expectations, plans and prospects constitute forward-looking statements for purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995.

Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in Thermo Electron's and Fisher Scientific's quarterly reports on Form 10-Q for the third quarter 2006 under the caption "risk factors" both of which are on file with the Securities and Exchange Commission and available in the Investor section of our website under the heading "SEC filings."

We also may make forward-looking statements about the benefits of the merger of Thermo Electron and Fisher Scientific, including statements about future financial and operating results, the new Company's plans, objectives, expectations and intentions, and other statements that are not historical facts.

While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so, even if our estimates change, and, therefore, you should not rely on these forward-looking statements as representing our views as of any date subsequent to today.

During this call we'll be referring to certain financial measures not prepared in accordance with Generally Accepted Accounting Principles, or GAAP.

A reconciliation of the non-GAAP financial measures used on this call to the most directly comparable GAAP measures is available in the press release setting fourth our fourth quarter 2006 earnings and future expectations and in the tables accompanying such releases in the Investor section of our website, thermofisher.com under the heading "Quarterly Results."

Related financial information is also available in the Quarterly Results section of the website.

With that I would like to now turn the call over to Marijn.

Thanks, Ken, and good morning to all of you.

Let me start off by saying it's really been an incredible year.

We had strong growth momentum every quarter by all key measures and this came from a number of things: the strength in our major end markets; important new product introductions; our culture of productivity throughout the Company; and our successful integration of businesses that we acquired.

And then in November, we capped it off by completing our industry-transforming merger to become Thermo Fisher Scientific.

We believe we are now in an enviable position.

We have the most advanced technologies, an unmatched breadth of products, the most extensive customer channels and we have the best employee talent to leverage these advantages to serve our customers.

Needless to say, I'm optimistic about our future.

Before I talk about our opportunities in 2007, let me hit the highlights of Q4 and full-year 2006.

And with the exception of adjusted EPS, I'm going to give you pro forma results, as if the companies had been combined in both periods, so you have a better year-to-year comparison of our results as Thermo Fisher Scientific.

So for the fourth quarter, our revenues grew 11%, our adjusted operating income rose 21%, our adjusted operating margin expanded 130 basis points to 15.2%, and our adjusted EPS increased 21% to $0.57.

For the full-year of 2006, our revenues grew 10% to $8.87 billion, adjusted operating income was up 21%, adjusted operating margin expended also 130 basis points to 14.7%, and adjusted EPS was better than we thought it would be at $1.91 for a 30% increase over our performance in 2005.

And 2005 was a very good year as well, because in 2005 we were up 25% over 2004.

So across the board, we believe these were excellent results in 2006, and that puts us in a very strong position for growth in 2007.

I just want to remind everybody that we are now reporting in two segments: Analytical Technologies and Laboratory Products and Services, and let me quickly remind you of how we define them.

The Analytical Technologies segment includes our high-end analytical instruments for a range of life sciences and industrial markets, as well as related bioreagents, automation systems and infomatics that allow us to create integrated work flows for our customers.

The other segment, the Laboratory Products and Services segment, includes our broad offering of products and consumables that are used in routine processes, our catalog and e-commerce sales channels and our biopharma services capabilities.

And here our goal is to offer the greatest choice and convenience for lab managers, whether they're in research, healthcare or safety markets.

Our businesses in both of these segments are well-equipped to address six key trends that we are seeing in our markets, and I outlined those back in December at our analyst meeting.

I want to take a few minutes again today to review these, because they will be important drivers of our growth in 2007 and beyond.

The first trend we're seeing is that scientists are demanding better integrated solutions, and we will continue to focus our technology development efforts on improving our ability to offer end-to-end work flows.

When it makes sense for us to complete our offerings by making a strategic acquisition, we will do so.

And our recent acquisition of Cohesive Technologies is a good example of that, because it's adding sample prep and liquid chromatography technologies to strengthen our solutions for drug discovery and other organic molecule analysis.

Trend number two is that we believe that research and diagnostic tools are starting to converge.

And we have the opportunity to build on our strong position in biomarker research, as those tools and the information they provide find their way into clinical labs for bio marker-based testing.

Trend number three is there is a growing trend to do analysis outside of the laboratory, and we have been successful in adapting sophisticated technologies for use on the production line or out in the field.

For instance, we expect very strong demand for our mercury monitoring systems, as utilities ramp up to satisfy EPA clean-air regulations that take effect in 2009.

Trend number four is that big biopharma is looking for more purchasing efficiency.

As drug companies continue to be very careful of how they spend money, we can help them standardize their purchasing higher up the technology chain through our breadth of offerings and convenient purchasing options.

And while we have recently seen that some big pharma companies are struggling, others are actually doing quite well.

And overall, we expect in 2007 the market environment in biopharma will be similar to last year.

Trend number five is that big biopharma is increasingly outsourcing noncore activities, and to make the best use of valuable laboratory space and assets, more and more often these companies are outsourcing non-critical work or functions outside of their expertise.

We have in this area a $500 million business that's rapidly growing and provides a range of services from clinical packaging to management of biological specimens.

And then trend number six is the highest growth is occurring in China and India, and everybody knows that to compete in today's global marketplace, you need to have the strong presence in those countries.

Right now, we have about 250,000 square feet of manufacturing space and more than 800 employees in China.

And with that base and a growing presence in India, we are well-positioned to serve emerging life sciences markets there, such as the generic pharma market, as well as supporting the demands in food, environmental, and industrial applications.

So clearly our markets pose a number growth of opportunities, and as Thermo Fisher Scientific, we feel we are in a great position to address them.

When we announced the merger back in May of last year and also at our analyst meeting in December, we said we would achieve approximately $75 million in merger-related synergies in 2007.

I'm pleased to report that the integration is going very well, and we fully expect to realize that amount this year.

Let me add to that that these synergies are mostly cost synergies which are fairly predictable.

As our new selling strategies take hold and new products continue to be introduced, we will achieve revenue synergies in the longer term, and we're cautiously optimistic there is a potential for upside in that area.

Based on our prospects for the year, we are reaffirming our previous adjusted EPS guidance of $2.35 to $2.45 in 2007, which would lead to adjusted EPS growth of 23% to 28% over our strong 2006 results.

We expect revenues to be in the range of $9.4 billion to $9.5 billion for approximately 6% to 8% growth in 2007.

On that note, I'm going to turn the call over to Pete Wilver, our CFO, to give you a detailed review of the financials.

Pete?

Thanks, Marijn.

Good morning, everyone.

Given the significant impact of the Fisher merger on our operating results and to provide better year-over-year comparisons, the revenue and operating income numbers as well as the working capital metrics that I will be discussing you today will be presented on a pro forma adjusted basis as if the companies had been combined in both periods.

Comparisons of below-the-line items, such as interest, taxes, share count, and earnings per share, will be discussed on an adjusted basis as reported.

Our results include the Laboratory Workstations business known as Fisher Hamilton, which Fisher had previously included in discontinued operations, and they exclude Genevac, which has been moved to discontinued operations.

The types of adjustments that we are making to operating income are the same as we have done in the past as Thermo.

However, the segment results now include stock compensation expense, as well as an allocation for corporate expenses, which is a hybrid of the methodologies historically used by Thermo and Fisher.

Stock compensation in 2007 is expected to be about $0.02 per quarter.

As Marijn said, our adjusted earnings per share for the quarter improved 21% to $0.57 as compared to $0.47 last year.

Full-year adjusted EPS was $1.91, up 30% versus $1.47 last year and up $0.21 from the high end of the originals guidance of $1.65 to $1.70 that we gave at the beginning of the year.

GAAP earnings per share in Q4 were $0.08.

This amount is lower than our adjusted EPS, primarily as a result of excluding from our adjusted earnings: acquisition intangibles amortization; merger related cost of sales charges; accrued restructuring charges, most of which were related to the merger; and a charge for the accelerated vesting of stock options at the merger date.

Q4 GAAP EPS was down from $0.34 in the prior-year's quarter, primary as a result of the merger-related cost of sales charges, higher acquisition intangibles amortization, higher restructuring and the stock acceleration charge, partially offset by significantly improved operating performance.

Assuming no further acquisitions, we expect 2007 acquisition intangibles amortization to be approximately $0.21 per quarter.

Our press release contains a detailed reconciliation between GAAP and adjusted EPS.

Pro forma revenues in Q4 increased 11% or $224 million year over year to $2.35 billion.

Pro forma organic revenues in the quarter were up over 5%, including non-merger related acquisitions and divestitures -- excluding, excuse me, non-merger related acquisitions and divestitures and favorable currency translation of 3%.

For the full year, pro forma organic revenues were up nearly 5.5%.

As you know, Fisher's safety business has been facing tough year-over-year comparisons all year and we also brought Fisher Hamilton back into continuing operations, which had an unfavorable impact on our top-line growth.

Excluding these two businesses, organic growth would have been 7% in both the fourth quarter and for the full year.

We won't have consolidated pro forma bookings information until next quarter, as a number of the legacy Fisher businesses didn't collect this information consistent with Thermo's practice.

However, bookings for the legacy Thermo businesses again exceeded revenues by about 4% this quarter.

In the Analytical Technologies segment, pro forma revenues rose 16% on a reported basis and 7% organically.

In the quarter, we continued to see strong growth in both our life sciences and industrial markets and our new product introductions, specifically in mass spectrometry, elemental analysis and environmental product lines also continue to be a key growth driver.

For the full year, pro forma revenues in Analytical Technologies grew 11% on a reported basis and 8% organically.

In the Laboratory Products and Services segment, pro forma revenues for the quarter increased 7% on a reported basis and 4% organically.

In the quarter we saw a growth across all of our major market segments with the exception of the safety-related government business.

For the full year, pro forma revenues in Laboratory Products and Services grew 9% on a reported basis and 4% organically.

As I mentioned earlier, inclusion of the security business and Fisher Hamilton in the Laboratory Products and Services segment depressed the organic growth year over year.

By region, we saw organic growth on a pro forma basis across all of our major regions.

North America grew organically at slightly below the Company average and Europe grew at slightly above the Company average.

Asia/Pacific grew in the high single digits and China posted growth in the mid teens.

The rest of the world grew at about 50% from a relatively small base.

Q4 pro forma adjusted operating income increased 21% or $63 million year over year to $357 million.

Pro forma adjusted operating margin was 15.2%, up 130 basis points from 13.9% in the year-ago quarter.

Pro forma stock compensation expense was $18 million in Q4 as compared to $29 million in the prior year, which contributed 50 basis points to the year-over-year margin expansion in the quarter.

Net integration synergies contributed about $2 million in Q4 or ten basis points.

The balance of the margin expansion came from pull through on our incremental organic revenues and impact of our sourcing and productivity initiatives.

For the full year, pro forma adjusted operating margin expanded by 130 basis points to 14.7% from 13.4% in the prior year.

Pro forma stock compensation expense did not impact our full-year margin expansion.

Analytical Technologies Q4 pro forma adjusted operating income increased by 25% year over year and pro forma adjusted operating margin was 17.9%, up 130 basis points versus 16.6% last year.

For the full year, pro forma adjusted operating margin expanded 110 basis points to 17.2%.

At our December analyst meeting we provided a 2007 estimate of adjusted operating margin for the Analytical Technologies segment of 19.9% to 20.5%.

Subsequently, we recognized that we had excluded approximately $90 million of inter-Company revenues from this segment.

Adjusting our estimate to include these revenues had the effect of reducing the 2007 operating margin rate estimate for Analytical Technologies by approximately 50 basis points to a range of 19.4% to 20.0%.

This change had no impact on our Laboratory Products and Services segment or the total Company estimates.

Laboratory Products and Services Q4 pro forma adjusted operating income increased by 17% and pro forma adjusted operating margin increased by 110 basis points to 12.4% versus 11.3% in the prior year.

For the full year, pro forma adjusted operating margin expanded 140 basis points to 12.2%.

Pro forma adjusted gross margin was 39.5% in Q4, up 30 basis points from the year-ago quarter.

For the full year adjusted gros margin was 39.6%, up 90 basis points from the prior year on a pro forma basis.

Pro forma adjusted SG&A was 21.9% of revenue in Q4, down 100 basis points from the year ago quarter, and pro forma adjusted SG&A decreased 50 basis points to 22.3% of revenue for the full year.

In terms of R&D expense, I'd like to focus on our Analytical Technologies segment, since over 80% of the Company's spend occurs in that segment.

In Q4, Analytical Technologies pro forma adjusted R&D was 4.8% of revenue as compared to 4.7% in the prior year.

For the full year, Analytical Technologies pro forma adjusted R&D was flat with the prior year at about 5% of revenue.

Moving to below the line items, adjusted net interest expense on a reported basis was $19 million in Q4, up $15 million from the prior year, primarily as a result of the merger.

Other income of $1 million was essentially flat with the prior year.

Our adjusted tax rate on our reported basis was 25.7% in Q4 and 28.4% for the full year, as compared to around 30% for both the quarter and the year in 2005.

During the quarter, we implemented a number of favorable tax planning structures that lowered our tax rate for the quarter and will reduce our tax rate going forward.

These structures were contemplated in the full-year 2007 tax rate guidance of 27.5% that we gave at our analyst meeting back in December.

We also benefited in the quarter from the inclusion of legacy Fisher earnings at a lower average tax rate than legacy Thermo.

The lower tax rate resulted in a $0.03 year-over-year increase in adjusted earnings per share for the quarter and $.05 for the full year.

Average diluted shares were 318 million for the quarter and 204 million for the full year, up significantly from the prior year in both periods as a result of the merger.

During the quarter, we bought back 1.6 million shares and used up the remaining balance of our current share buy back authorization.

We continue to expect full-year average diluted shares to be in the range of 440 to 445 million in 2007.

In terms of balance sheet performance, we ended the quarter with $691 million in cash and investments, up $518 million from Q3, primarily as a result of the merger and strong operating cash flow.

Our debt increased to $2.66 billion, up $2.13 billion from Q3.

The merger added approximately $2.3 billion of debt, and during the quarter we paid down about $85 million of short-term debt, and we issued a redemption notice on an in-the-money legacy Thermo convertible that forced conversion of about $70 million of debt into shares.

Pro forma receivables DSO was 53 days, a one-day increase from the prior year on a pro forma basis.

The primary driver in the increase was a higher percentage of international revenues, which generally have longer terms and average collection times.

Pro forma inventory days of supply was 74 days, up seven days from the prior year, driven primarily by an eight-day increase related to the purchase accounting inventory step up.

Cash flow from continuing operations for the full year was $410 million.

After deducting net capital expenditures of $71 million, full-year free cash flow from continuing operations was $339 million.

There were a number of one-time merger related cash outflows in Q4 that totaled approximately $160 million.

If you adjust for these items, free cash flow from continuing operations was $499 million for the year or 129% of reported adjusted net income.

For 2007, we expect free cash flow from continuing ops to be in the range of $900 million to $950 million.

So let me just review with you the guidance that we have in our press release.

We are maintaining the 2007 adjusted EPS guidance of $2.35 to $2.45 that we recently communicated the our December analyst meeting.

This range represents 23% to 28% growth over our 2006 adjusted EPS of $1.91.

We expect our full-year 2007 revenues to be in the range of $9.4 billion to $9.5 billion, which is an increase of approximately 6% to 8% over our pro forma 2006 revenues.

And finally our integration projects are progressing well and we remain confident that we will achieve $75 million of synergies in 2007.

So in summary, this was a good quarter for us, both in terms of growth and operational performance, despite the challenges we faced in completing a large-scale merger in the middle of the middle of the quarter.

We are pleased with the results and believe that we are positioned well to meet our goals in 2007.

And with that I'll turn it over to the operator to take questions.

Thank you, sir. [OPERATOR INSTRUCTIONS] Our first question is from Mr. Ross Muken from Deutsche Bank.

Mr. Muken, your line is open.

Thank you.

Good morning, guys.

Morning, Ross.

Could you give a little more color around the respective markets in the North American, European and Asian geographies that caused it to be either above or below the total corporate organic growth?

I'm just trying to get a sense for whether it's North American pharma that's particularly weak, which is drawing that down, or is it industrial or -- or is it environmental in Europe that's driving strength.

Ross, good morning, this is Marijn.

It has a lot to do -- Asia, of course, is the fastest growing and it's obvious why.

The balance between North America and Europe, North America growing a little less than Europe really has to do with year-over-year comparisons.

Europe was not great in 2005 and has come back quite significantly in 2006, and that's been going on for a few quarters already.

So I would say that -- that it has more to do with year-over-year tough or easy comparison than with any huge, significant shifts in markets.

But in terms of pharma you sort of described that as a bit of a mixed bag.

Can you just give comments on what you're seeing in biotech, academia and then also in the industrial markets?

Are we seeing any softness in the commodity related businesses or do we still have plenty of runway on that, given the time lag?

Yes, I think biotech has obviously grown faster than big pharma right now.

That's not a surprise.

Both big biotech and small biotech and also CROs are growing.

Genetic pharma is growing.

If you look at that scale large pharma is growing less fast than the others areas that I mentioned.

From an industrial point of view, we have not seen signs of -- of slowing down in the demand for -- from our industrial customers at this point.

And as -- as I have mentioned many times before, even if there would be a -- a slowdown in this area because we are late cycle beneficiaries, so to speak, of the industrial market we will have two or three quarters of -- of back log and orders already in the system to -- before we are going to see that slowdown.

But we haven't seen the slowdown in orders yet.

One quick question for Pete.

I'm not sure if I missed it, but did you have what organic growth would be for the total Company, excluding the Fisher safety and preparedness business, which had been driving down historically over the last several quarters, organic growth for them?

Yes, I did mention that.

And for both the quarter and the year, if we excluded both the safety business and the Fisher Hamilton business, which has relatively slow growth, the organic growth in both periods would have been 7% instead of 5% in both periods.

Great, thanks, guys.

Thank you, Ross.

The other thing to keep in mind for North America is the safety business impact: North America much more directly than the other markets, so that adjustment almost 100% flows into North America.

Yes.

Thank you, Mr. Muken.

Our next question or comment comes from Mr. Derik De Bruin from UBS.

Mr. De Bruin, your line is open.

Good morning.

Morning, Derik.

When you start looking at the synergies that you're going to see from the business, I guess, Marijn, you said you'd already made a good start on that.

Could you just tell us where you see the low-hanging fruit and, I guess, just give a pathway on some of the milestones we can use to judge the integration process?

If you remember, at the analyst meeting Pete showed different buckets of where the synergy was going to come from, both in 2007 and then the three-year out synergy and it was sort of an indication there is this short term, medium term, or long term.

The short-term area, for instance, corporate -- corporate synergy, overhead synergy.

We're now running one corporation rather than two, so a lot of the cost of running two corporations has already come out, and you could say that that's relatively low-hanging fruit in terms of the timing of getting those synergies.

Other synergies that we've already accomplished are larger sourcing contracts with certain big suppliers, in freight, for instance, or personal computers.

Those type of -- of large suppliers where we go to one contract, bigger Company, more leverage, lower prices, and as a result of that, immediate synergy.

Now we're moving sort of in the mid range, which is certain other sourcing synergies, some consolidation of factories that we're beginning to do.

And then the longer-range synergies are the revenue synergies that I mentioned in my comments.

So we're very, very confident that we will hit the $75 million synergies of 2007, as these are all cost-related synergies and rather predictable and we quite honestly have -- have a nice chunk of them already in the bank.

Great.

Now did -- excuse me if I missed it, but did you mention what the -- what your vitality index was for the quarter?

I guess how soon -- I guess in terms of new product introductions and potential synergies from layering in the consumables into the Thermo instrument platform, I guess how long do you see the R&D cycle going before you start generating new products from that?

Yes.

Of course we can only do the vitality index on the basis of legacy Thermo and the vitality index for all of 2006 was 29%, which is -- is a great number, obviously.

So we're very proud of the continued momentum we have in the new product introductions.

We will continue to drive technology by technology new product programs, of course.

But part of our R&D spend will also go to improved integrated solutions, as you say optimize the work flows so that instrumentation, software, and consumables are more tailored to each other for certain high growth, mostly life sciences applications.

And that work has started but it's R&D and marketing.

It's -- it's some -- in some cases, we can put something together quickly.

In some other cases, it's going to take longer.

But I think over the next one to two to three years, that will be layered in and you see us more and more selling these integrated solutions rather than the individual components of a work flow.

Great, and just one final question.

I guess how do you see new lab construction in terms of the potential to help boost the workstations business and to -- to just drive from the overall growth in the laboratory services?

Yes.

Well, new lab production is up a little bit in 2006, and sort of going into 2007 the activity seems to be picking up.

We have the lab workstations business now in continued operations, as Pete said, which is the traditional Fisher Hamilton.

And obviously the advantage there is that we will have an incredible radar screen now of new labs that are being built, because the old legacy Fisher Hamilton quotes on almost every single lab in the world that's being built, so that's great intelligence for the rest of Thermo Fisher.

Thanks, guys.

Okay, thanks.

Thank you, Mr. De Bruin.

Our next question or comment comes from Tycho Peterson from JPMorgan.

Your line is open.

Good morning.

Thanks for taking the call.

Following up, I guess, from the last question on lab workstations.

I know you got the question at the December analyst meeting of the rationale of bringing back Fisher Hamilton into the fold.

Can you give us a sense of how quickly you think you can turn that business around, given it was something you highlighted as an underperformer this quarter?

I think that some of it is basic blocking and tackling, and the business has started to turn around already in the last few quarters.

Legacy Fisher had initiated that already, so the business is doing better and it still has year-over-year comparisons that were quite tough, but I -- I'm confident that the business is going to be better than it was.

We're going to try to -- to leverage that business in the context of the total Company, and as I just mentioned to Derik, there is a rationale for that, obviously.

We are going to try to really benefit from having that in the portfolio.

I mean, it's logical if you think about the steps of building a laboratory.

You get an architect.

Then you start needing the furniture and the laboratory work stations, the tables, and then sooner or later equipment is going to be put on those tables.

So,it makes sense in terms of -- of the demand flow of people building laboratories and being in touch with us.

So we'll see, we'll see.

I am not -- I don't know where it is all going to end up, but it certainly seems like it is a good match with the overall strategy.

Okay.

That's helpful.

Pete, you had mentioned you finished the buy back this quarter.

Is that a priority to do another one or how do you view uses of cash in the near term?

Well certainly we're committed to deploying our capital to create value for shareholders and we also are committed to trying to maintain our share count at some -- some consistent basis.

So we will be contemplating whether or not we'll put another share buy back authorization in place, obviously with the approval of the board, going forward.

Okay.

Also, Pete, could you give the organic growth number for Thermo in the fourth quarter?

For the whole Company?

No, just the Thermo piece.

Is that something you could break out for us?

No, we're really not going to be reporting that going forward.

We'll be giving the segment detail and the total Company, but not legacy Thermo and legacy Fisher data.

Okay.

And then finally, as we think about some of the upcoming conferences this Spring, anything in particular we should be focusing on in terms of products?

Obviously you won't necessarily tell us what's in the queue but in terms of Pittcon coming up, anything you may be highlighting?

I'd say, Tycho, don't miss it, but I can't tell you anything because they'll butcher me back in the office.

Fair enough.

Thank you very much.

Congratulations.

Thanks

Thank you, Mr. Peterson. [OPERATOR INSTRUCTIONS] Our next question or comment comes from Mr. Jason Weiss from Robert W. Baird.

Mr. Weiss, your line is open.

Good morning.

You've shown impressive EPS growth rates in 2006 pro forma-30%-and you're guiding for 25% in 2007.

Can you comment on how you see the -- kind of that long-term growth rate?

Once you get over some of the initial corporate synergies how do you see that growth rate progressing in the future.

This is Marijn.

I mentioned last year, year over year, we did -- was it -- 25%.

In '06 30%, for now 23% to 28%, so call it mid 20s again.

So we're going to try to keep this up for a while, quite honestly.

And I think with the opportunities we have, both in terms of -- of the market positions, our new products, the synergies that are going to come through for the next few years, new products, as I mentioned.

I don't see a reason not to sort of be in the -- in the 20% EPS growth for the next few years.

I really don't.

We have margin expansion opportunity, so we're around 15% now.

We're saying 16.5% for '07.

That can go to 20%, the low 20s as well in terms of operating margins.

So I'm -- I really don't see that we're going to hit the wall on this type of -- of performance improvement any time soon.

Great, thank you very much for taking my call.

You're welcome.

Thank you, Mr. Weiss.

Our next question or comment comes from Tony Butler from Lehman Brothers.

Your line is open.

Yes, thank you very much.

Pete, just a couple of housekeeping items.

You commented on unusual cash flow items of $160 million of the quarter.

Can you comment on the nature of those items but more importantly, does any of that actually leak into next year with respect to your $900 million to $950 million target for '07?

And second, while did you a nice job on the taxes for this past year, 27.5%, the question is, can taxes be actually be lowered, either over the near term or the long term from that level?

Thanks a lot.

As far as the unusual items, they're basically merger-related items, executive severance, paying the bankers, those type of items.

So those things obviously won't leak into 2007, but in 2007, we will have some cash outflows related to merger synergies and restructuring, plant closures and things like that.

So we will be spending some amount of money in 2007, which is already factored into that $900 million to $950 million estimate that I talked about.

In terms of the tax rate, at this point, it's really early in the year.

I don't really want to start talking about components of our $2.35 to $2.45 guidance.

As I said, the -- the changes that we made in our structures to the tax rate in Q4 were contemplated in the 27.5% forecast that I gave back in December, so at this point, we are just sticking with -- with the guidance that we gave back in December.

Thanks, Pete.

Thank you, Mr. Butler.

Our next question or comment comes from Mr. John Sullivan from Leerink Swann.

Mr. Sullivan, your line is open.

Hi, guys.

Can you talk about services associated with your businesses and what sort of growth rate you see and whether that is a particular opportunity, hanging related services to some of your instrument and product franchises on your -- on your business in 2007?

Is that something that investors should be looking for?

Yes, John, good morning, this is Marijn.

Yes, absolutely.

I was mentioning in my comments that we have a biopharma services business that is a legacy Fisher business, which is in an extremely good position to -- to do work that big pharma and big biotech is outsourcing.

They are growing rapidly.

One of their key businesses is packaging drugs -- packaging for clinical trials.

So they manage to the whole process of getting trials that are going -- drugs that are going through clinical trial, getting them to the patient and the entire delivery and tracking process of that.

Something that big pharma used to do themselves and is now more and more outsourcing.

It's one of the first things that they want other people to do.

So we believe that -- that -- well you can see it with the Pfizer announcement, for instance, of last week, there is going to be more and more outsourcing taking place, particularly, I think, in the service area, and we are in some key elements of that very well positioned.

Thanks very much.

Okay.

Thank you.

Thank you, Mr. Sullivan. [OPERATOR INSTRUCTIONS] Our next question or comment comes from Mr. Paul Knight from Thomas Weisel Partners.

Mr. Knight, your line is open.

Marijn?

Yes, hi, Paul.

Hi.

Thought I was left out there.

We would never leave you out, Paul.

The -- I'm assuming you always face the risk of sales force integration, and how do you mitigate that risk in Q4 and how is it right now in Q1?

Yes, sales force integration is something that needs to be done slowly over time, no -- no sudden movements.

And I think we've learned from when we -- when we did "One Thermo" years ago, five, six years ago and we went to the one brand and we did it slow and steady and that was the way to do it.

And we have certain levels of integration that are taking place now, but, again, very, very gradually and with very, very good training of the sales force, so that they know exactly what -- what their new portfolio is and how they need to sell things differently than they've done in the past.

I actually attended four large Commercial meetings in January of different parts of the business where we brought all of the salespeople globally together.

A lot of training went on in those -- in those meetings.

But it's -- it's slow and steady is the way to do it.

And we're not going to sit in front of you ever and make excuses because of sales force integration because we're doing it in a very, very deliberate way.

And then, secondly, the -- the deals you've announced recently, SwissAnalytic and Cohesive, would imply you're trying to be a little more aggressive in the world of liquid chromatography.

Can you talk about your chromatography strategy and what that means for mass spec, as well?

Yes, chromatography and mass spec are obviously very often coupled in the laboratory because HPLC is the front end very often of a mass spectrometer.

And what we are doing is just very selectively upgrading our capabilities that are good on a fundamental basis, but try to upgrade them with selective acquisitions like that.

And these actually are two examples that help our chromatography franchise, both of them in a different way.

So, you know, it's -- it's an important part of our portfolio, and it's important for mass spec.

It's important for the customers because the customers are using the technology very broadly.

And we're just through internal development and some selective acquisitions trying to be -- get stronger and stronger in it over time.

Thanks, Marijn.

Okay, thank you, Paul

Thank you, Mr. Knight.

Gentlemen, at this time I'm showing no further questions nor comments from the audience.

You all may continue.

Okay.

I would like to just -- a quick closing remark.

Thank you very much for being on the call.

And we are very, very excited about what we've been able to accomplish in 2006, and -- and our opportunity going forward in 2007.

And we look forward to updating you throughout the year on our progress.

So, thank you very much for joining us.

Thank you, ladies and gentlemen, for participating in today's Thermo Fisher Scientific fourth quarter 2006 earnings conference call.

This does conclude your conference.

You may all disconnect and have a great day.